A ‘watershed moment’ for the digital sector - the Digital Markets, Competition and Consumers Bill

In this first briefing we explore Part 1 of the Bill, which establishes a new pro-competition regime for digital markets. This regime will be overseen by the Digital Markets Unit (DMU), which has operating in shadow form since 2021 but will be put on a statutory footing. This new regime is intended to address pro-actively the far-reaching market power of a small number of tech firms, thereby promoting effective competition and supporting innovation, investment, and growth in digital markets.

The Competition and Markets Authority (CMA) have welcomed this draft legislation, stating that the new digital markets regime will enable them to maintain ongoing, but targeted, regulatory oversight of companies with substantial and entrenched market positions in digital markets.

Companies with strategic market status (SMS) designation

A key concept of the Bill is that the DMU can designate companies as having a strategic market status (SMS) in respect of a digital activity linked to the UK.

The DMU can decide that a company has SMS if it:

1. carries out a digital activity which is linked to the UK. A digital activity is considered to be “linked to the UK” if it has a significant number of UK users, or the undertaking carries on business in the UK in relation to the digital activity, or if the activity (or the way it is carried out) is likely to have an immediate, substantial and foreseeable effect on trade in the UK.
2. has “substantial and entrenched market power” in respect of the digital activity
3. has a position of “strategic significance” in respect of the digital activity
4. the DMU estimates that:
   1. the total value of the turnover of the company or the group exceeds £25 billion in a 12-month period
   2. the total value of the UK turnover of the company or the group exceeds £1 billion in a 12-month period

Digital activities are broadly defined in the Bill as:

1. the provision of a service by means of the internet
2. the provision of one or more pieces of digital content
3. any other activity carried out for the purposes of any activity in 1. or 2. above

The DMU must carry out an investigation before determining that a company has SMS, and this investigation must be concluded within 9 months (which can be extended for 3 months in exceptional circumstances). The SMS designation lasts for a period of 5 years beginning with the day on which the DMU gives the notice of the SMS designation, although SMS designation can also be revoked.

Given the high turnover thresholds that must be met, it is likely that only a small number of companies will initially be designated as having SMS. However, this will not necessarily be a static group and could change over time.

What are the consequences of having strategic market status?

If a company is designated as having SMS, they can be subject to a number of interventions.

Conduct requirements

The DMU may, after public consultation, impose conduct requirements for the purposes of achieving specified objectives relating to fair dealing, open choice and trust and transparency.

The conduct requirements will specify how the company with SMS status must conduct itself in relation to a relevant digital activity. The Bill sets out an exhaustive list of “permitted” types of conduct requirements (for example, an obligation to trade on fair and reasonable terms), which are broad in scope. Moreover, unlike the EU’s Digital Markets Act (see below), which specifies particular obligations that apply to all firms which have been designated with “gatekeeper” status, the Bill will allow the DMU to impose bespoke conduct requirements that are tailored to individual companies with SMS.

The Bill imposes an ongoing duty on the DMU to keep conduct requirements under review, specifically whether to impose, vary or revoke a conduct requirement. This implies that there may be scope under the new regime for third parties to complain to the DMU with the objective of having additional conduct requirements imposed on a company with SMS status.

Pro-competition interventions

The DMU can, following an investigation, make pro-competition interventions (PCI) in order to remedy competition problems that it finds in relation to the digital activities undertaken by companies with SMS. These interventions can only be imposed if the DMU consider that:

• a factor or combination of factors relating to a digital activity is having an adverse effect on competition
• the PCI would likely contribute, or be of use for the purpose of, remedying, mitigating, or preventing the adverse effect on competition

PCIs could take a variety of forms such as general restrictions on conduct (such as orders prohibiting the company from making an agreement) to structural orders, such as separation of business units within a firm.

The ability to impose PCIs is similar to the Competition and Market Authority’s market study and market investigation tools, although a PCI investigation will be materially quicker (9 months).

Mergers

Companies with SMS will be required to report to DMU transactions which result in the company, or their group, having:

• qualifying status in respect of shares or voting rights in relation to a UK-connected body corporate
• the value of the consideration for the transaction is at least £25 million

The “qualifying status” requirement will be met if the company with SMS (or their group) increases its share or voting rights:

1. from less than 15% to 15% or more
2. from 25% or less to more than 25%
3. from 50% or less to more than 50%

The form of the report has not yet been published, so it is unclear at present what information would need to be provided. However, once the CMA accepts a report as being complete, the company with SMS must wait for five working days while the CMA decides whether to open a phase 1 merger control review under the Enterprise Act 2002 before it can complete the transaction. In effect, this therefore introduces a mandatory, short-term suspensory reporting regime.

What are the CMA’s enforcement powers?

The Bill envisages that the CMA should seek to resolve any concerns relating to the conduct of companies with SMS in a co-operative manner. That said, the Bill will give the CMA extensive powers of enforcement in relation to non-compliance including:

1. the power to conduct investigations
2. the power to accept commitments
3. the power to impose fines of up to 10% of global turnover

How does the Bill compare with the EU’s Digital Markets Act?

The Bill was preceded by the EU Commission’s Digital Markets Act (DMA), which took effect on 2 May 2023. The DMA is aimed at making markets in the digital sector fairer and more contestable and is enforced by the European Commission. There are similarities with the Bill, but also several important differences.

The DMA is targeted at so called “gatekeepers,” which are large digital platforms providing core platform services (e.g., online search engines; app stores; messenger services). To be a gatekeeper, a company needs to meet the following requirements:

• it must have a significant impact on the internal EU market, by reference to certain turnover thresholds
• it must provide a core platform service which is an important gateway for business users to reach end users, by reference to the number of active end users and active business users
• it must enjoy (or be about to have) an “entrenched and durable position” in its operations (i.e., the company has met the two criteria above in the last three financial years)

The threshold of an “entrenched and durable position” in the market is different from the requirement in the Bill that a company needs to have substantial and entrenched “market power” to be designated as having SMS. In addition, if the European Commission designates a company as a gatekeeper, the company will have a maximum of six months to ensure compliance with the DMA. These comprise a list of “dos” (obligations) and “don’ts” (prohibitions) that are set out in the legislation. For example, gatekeepers will no longer be able to track users outside of the gatekeepers' core platform service for the purpose of targeted advertising if effective consent has not been granted. By contrast, the UK’s Bill does not contain a fixed list of “dos” or “don’ts” but allows the DMU to impose conduct requirements tailored to the relevant company.

Key takeaways

Sarah Cardell, Chief Executive Officer of the CMA, stated that the Bill represents a “watershed moment” for the way in which the CMA ensures digital markets work for the UK economy, supporting economic growth, investment, and innovation. Similar to the DMA, the Bill creates a legal framework based on principles of proactive, ex ante (before the event) regulation of the most powerful digital firms with the aim of fostering innovation and effective competition in digital markets. Whilst it is likely that only a small group of companies will be designated as having SMS, at least at the outset, the legal framework of conduct requirements and PCIs will nonetheless be important for non-SMS businesses who have commercial relationships with companies who are designated as SMS.

The Bill also places the CMA squarely at the centre of regulation of the UK’s digital economy; the DMU will have a wide discretion when determining conduct requirements for companies designated as having SMS, backed up with extensive enforcement powers. To support the exercise of these powers, the DMU has expand since its inception and is reported to have at present a headcount of seventy, although it is understood that the DMU intends to grow further.

Looking at the wider context, the Bill has been introduced at a point in time in which the CMA has already demonstrated that it is willing to intervene and challenge large digital companies under its merger control powers. For example, on the same day as the Bill was introduced, the CMA announced that it had decided to prohibit Microsoft’s proposed acquisition of Activision Blizzard, a decision which provoked a particularly strong reaction from the parties. You can read more about this decision in our briefing here. 

Next steps

MPs will consider the Bill at a Second Reading, the date of which is yet to be announced. When approved by Parliament (which could be in late 2023, or early 2024), it is expected that the new measures will take effect as soon as possible, subject to secondary legislation and the publication of guidance.